The Bank of Japan Purchases Numerous Bonds to Support the Governor’s New Targets

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In response to recent speculation, rewinding its super-accommodative monetary policy, the Bank of Japan announced an unprecedented third day of unscheduled bond purchases.

The combination of additional fixed-rate and fixed-amount purchases announced on Friday pushed the Bank of Japan’s total bond purchases for this month to an unprecedented ¥17 trillion ($128 billion).

Kazuhiko Sano wrote in a research note, “Honestly, I don’t understand the BOJ’s intention,” He is the chief bond strategist at Tokai Tokyo Securities and a three-decade bond veteran.

Kazuhiko Sano added, “The wider trading band is only fanning speculation of more policy changes and increased bond purchases risk reducing market liquidity even further.”

The Bank of Japan’s (BOJ) record-breaking bond-buying spree has been spurred by its shock decision to raise the benchmark yield on the nation’s 10-year bonds to 0.5% at a policy meeting on December 20th. The move was unexpected and has sent yields rocketing higher as markets have reacted with surprise.

On Friday, the Bank of Japan (BOJ) went above and beyond its normal operations by offering to purchase an unlimited amount of two-year bonds yielding 0.04% and five-year debt at 0.24%. This came with a total of ¥700 billion in one-to-ten-year bonds and ¥300 billion in 10-to-25-year debt.

“It looks like the BOJ isn’t tolerating higher yields on shorter notes,” said Keisuke Tsuruta, bond strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

The central bank appears determined to defend its new rate target and keep yields from rising too sharply and damaging Japan’s fragile economic recovery. This has seen it engage in massive daily buying operations, with each purchase session accounting for a large portion of the total trading volume.

Eisuke Sakakibara, professor at Aoyama Gakuin University Tokyo and former vice finance minister, has suggested that the Bank of Japan (BOJ) may surprise markets again by tightening monetary policy in the next month.

Analysts predict this trend will continue as long as yields remain elevated and uncertainly concerning future monetary policy remains high.

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